Fed’s Yellen says rate rise not assured

Federal Reserve Vice Chairman Janet Yellen said the central bank may hold the benchmark lending rate near zero even if unemployment and inflation hit its near-term policy targets.

The Federal Open Market Committee said in December it will hold the main interest rate in a range of zero to 0.25 percent so long as inflation isn’t forecast to rise more than 2.5 percent in one to two years and unemployment remains above 6.5 percent.

Yellen said today those objectives are “thresholds for possible action, not triggers that will necessarily prompt an immediate increase” in the FOMC’s target rate. “When one of these thresholds is crossed, action is possible but not assured,” she said.

U.S. central bankers are focusing the full force of monetary policy on reviving growth and reducing 7.9 percent unemployment, using near-zero interest rates and a program of unprecedented bond buying. Yellen’s comments reflect the view of some policy makers that there is a risk of damaging the expansion by raising rates too early.

The Fed in September started a third round of asset purchases and expanded it in December to $85 billion per month, saying the quantitative easing will continue until the labor market is improving “substantially.”

“With employment so far from its maximum level and with inflation currently running, and expected to continue to run, at or below the Committee’s 2 percent longer-term objective, it is entirely appropriate for progress in attaining maximum employment to take center stage in determining the committee’s policy stance,” Yellen said today in a speech to the AFL-CIO in Washington.

Yellen noted that the FOMC maintains a longer-run goal for inflation of 2 percent while the FOMC estimates that labor resources are fully utilized at an unemployment rate of 5.2 percent to 6 percent.

“Our control over the economy is imperfect, and so temporary deviations from the FOMC’s specific longer-term goals will sometimes occur,” Yellen said. “Importantly, these quantitative goals are neither ceilings nor floors for inflation and unemployment, and the committee will take a balanced approach to returning both measures to their objectives over time.”

The Fed vice chairman said she believes high unemployment is the result of too little demand rather than a mismatch of workers’ skills with the needs of employers. She said the economy faces headwinds in the form of a battered real estate market, low income expectations by households, and fiscal restraint.

The Fed’s asset purchases and other unconventional policies have helped “shore up aggregate demand,” Yellen said.

“However, while this contribution has been significant, lower interest rates may be doing less to increase spending than in past recoveries because of some unusual features of the Great Recession and the current recovery,” she said.

Unemployment averaged 8.1 percent last year as the expansion which began in June 2009 was too weak to pull it lower.

The Fed under its congressional mandate seeks to promote “maximum employment” and “stable prices.” The personal consumption expenditures price index is below the central bank’s stated goal of 2 percent, rising just 1.3 percent last year.

Some 4.7 million people were unemployed six months or more in December, a condition that Chairman Ben S. Bernanke called “an enormous waste of human and economic potential” at a press conference after a Dec. 11-12 meeting of policy makers.

The central bank’s asset purchases have pushed its balance sheet above a record $3 trillion.

Even so, the U.S. economy contracted at a 0.1 percent annual rate in the fourth quarter of 2012, dragged down by the biggest plunge in government defense spending in four decades. The outlook for fiscal policy, which could include further defense cuts, is still clouded by disagreement in Washington over federal taxation and spending.

Prices on the 10-year Treasury note rose after Yellen’s remarks. The Treasury issue’s yield stood at 1.94 percent at 1:20 p.m. in New York, down about 2 basis points from trading prior to Yellen’s speech. A basis point is 0.01 percentage point. Yields have risen from 1.72 percent since the Fed announced new bond buying on Sept. 13. The Standard & Poor’s 500 Index was 1,515.47, down 0.2 percent but little changed after the Fed’s vice chairman’s remarks.

The FOMC said last month its asset purchases will remain divided between $40 billion a month of mortgage-backed securities and $45 billion a month of Treasury securities. The central bank also will continue reinvesting any Treasury securities that mature and will reinvest its portfolio of maturing housing debt into agency mortgage-backed securities.